Can investors trust the surprise market recovery?

If the stock market’s sharp volatility in March came as a shock, the subsequent recovery has been far more surprising.

It wasn’t hard to understand why share prices plummeted as the world went into lockdown to slow the spread of Covid-19, but the rebound is harder to explain. It has been described as the most hated rally in history, and is probably the least expected.

Investors now fear being sucked into a recovery only for share prices to crash again as the world tips into recession. So why is it happening and can it continue?

Rising unemployment is a real risk to the economy, as it hits demand and consumption, but this will only make itself felt in the third quarter of this year.

Steen Jakobsen, Saxo Bank

You may not be able to comprehend this rally, but the longer it lasts the harder it is to ignore. Global stocks flew again on Friday, after US non-farm payroll data showed 2.5 million jobs being created in May, instead of the anticipated 7.5 million loss.

That astonishing figure still leaves US unemployment at 13.3 per cent, while Bank of America suggests it could be as high as 21.6 per cent, but investors were in no mood to quibble and bought more shares.

Fawad Razaqzada, market analyst at ThinkMarkets, says non-farm payroll data “absolutely smashed expectations” as virtually nobody had expected a positive number. “This suggests the economy is turning around faster than most people expected.”

The S&P 500 is now up more than 40 per cent from its March lows, while Asian markets hit a three-month high and shares in the UK and Europe rose strongly as well.

Oil was up in anticipation of increased demand with Brent crude topping $42 a barrel, while safe haven gold fell below $1,700 an ounce as investors embraced risk instead.

Markets got a further rocket from the European Central Bank (ECB), which increased its Pandemic Emergency Purchase Programme (PEPP) by €600 billion (Dh2.48 trillion), lifting total ECB stimulus to €1.35 trillion, while the German government agreed to a €130bn fiscal stimulus package.

The US is lining up another $1tn (Dh3.67tn) of stimulus for June, and this wall of money is the real reason markets have decoupled from the real economy.

In today’s “risk-on” world investors are screwing up their courage and going bargain-hunting in oversold sectors such as airlines, hotels and car manufacturers, while selling off safe havens such as the US dollar and gold.

Chris Beauchamp, chief market analyst at online trading platform IG, says the US economy is back with a bang: “Canadian employment activity surged too, suggesting a V-shaped recover.”

When shares dip, investors snap them up, because “they clearly think the recovery will be much swifter than originally feared,” he says.

The big worry is that the US Federal Reserve may scale back its stimulus in response. “That might be the…